After global markets endured one of their worst weeks since before the Global Financial Crisis due to the rapid spread of COVID-19, a week of rate cuts from central banks the world over, failed to stem market volatility.
The week started on a bleak footing for analysts as Chinese Non-Manufacturing and Manufacturing PMI data, available on Monday, showed the extent of the havoc the virus has wreaked on the Chinese economy. With a reading above 50 showing expansion, and below highlighting contraction, Non-Manufacturing output collapsed from 54.1 in January to a previously unthinkable low of 29.6 in February, with manufacturing slipping from 50 to 35.7.
Although the effects of the Coronavirus drove the majority of market movements for the week, some rays of light did shine on the domestic economy at least. Data showed the sharpest rise in construction output since December 2018, with UK construction companies signaling a return to business activity growth during February, following a nine-month period of declining workloads. The latest survey also pointed to the sharpest rise in new orders since December 2015. Anecdotal evidence mainly linked the recovery to a post-election improvement in business confidence and pent-up demand for new projects.
More encouraging signs were also to be found midweek as the US Federal Reserve cut rates by 0.5% in an attempt to blunt the effects of the Coronavirus on the US economy. Federal Reserve Chairman, Jerome Powell, reiterated his view that the US economy remains strong, but the virus had caused a material change in the central bank’s outlook. Unfortunately, the move failed to calm markets, spooking investors over a broader slowdown that may manifest. All major US indices closed more than 3% lower after the news.
Although Wednesday saw gains in the US following moderate Joe Biden’s success in the “Super Tuesday” primaries, any such momentum was more than wiped out on Thursday. Falling markets became very much the theme for the second half of the week, picking up where they left off from last week, driven by a Coronavirus induced panic. Thursday saw global stocks tumble further, with shares in banks and travel companies bearing the brunt of investor selling. The Dow Jones shed a further 3.58% with the S&P 500 closing down more than 10% from its highs reached on the 19th of February.
With the collapse of Flybe over this side of the pond, airlines such as EasyJet and International Airlines Group (IAG), parent company of British Airways (BA), fell around 5% each. Research shows that the Coronavirus could rob passenger airlines of up to $13 billion in revenue this year with cruise operators seeing similar potential losses. The wider leisure industry also suffered as Cineworld shares fell roughly 20% on the news that the new James Bond film’s release date would be delayed.
By the end of the week, fears of a prolonged economic slowdown had fully gripped markets, with all major bourses nursing further losses. News from the US showing the virus had spread across four more states clearly rattled investors as treasury yields fell to a record low of 0.756%. Falling Treasury yields also hammered the dollar, which fell to a two-year low against the Swiss Franc.
The week ahead
In a week that will be admittedly dictated by the pace of the coronavirus outbreak, a raft of economic data is set to be released which should allow us to gauge just how large the impact of the virus has been so far on the global economy.
The first clues could come as early as Monday with the release of China’s trade balance numbers. China, the source of the outbreak, has been one of the worst affected nations so far as detailed by its poor PMI data last week, so it will be fascinating to see if their imports and exports have been affected. A country’s trade balance details the difference in value between imported and exported goods during the previous month and has a direct link to currency as foreigners usually pay for goods in the exporter’s domestic currency.
On domestic shores, the major day will be Wednesday as the new Chancellor Rishi Sunak prepares to deliver his first Budget. With much expected from the new man in Number 11, the upcoming Budget could prove to be something of a damp squib as the new national infrastructure strategy to invest £100bn into boosting the economy is expected to be delayed until after the Budget announcement. The plan to improve transport connectivity and work towards achieving net-zero emissions by 2050 had been set to be published “alongside” the budget, which is due on Wednesday. However, the Chancellor is now expected to unveil such plans at a later date, although Whitehall sources say this should be a matter of days or weeks.
The week should be rounded off in Europe, where European Central Bank (ECB) President, Christine Lagarde, will be holding a press conference, commenting on the current state of the European economy. The press conference is about an hour long and has two parts - the first, a prepared statement is read, then the conference is open to press questions. The questions often lead to unscripted answers which can create heavy market volatility. With the coronavirus also taking its toll on the European economy, it will be interesting to see if the central bank makes any references to potential rate cuts.
The information in this blog or any response to comments should not be regarded as financial advice. If you are unsure of any of the terminology used you should seek financial advice. Remember that the value of investments can go down as well as up, and could be worth less than what was paid in. The information is based on our understanding in March 2020.